When the bear market was at its worst, many struggling companies had no choice but turn to hedge funds to raise capital and bail them out.Few would have imagined that a star hedge-fund manager who participated in these rescue refinancings would later become the Financial Services Authority’s first scalp in its mission to stamp out sharp practice in the hedge fund industry.The UK regulator on Tuesday formally found Philippe Jabre, former managing partner of GLG Partners, guilty of market abuse after trading on inside information relating to a fundraising more than three years ago.While the ruling only rubber stamps an earlier judgment that Mr Jabre appealed unsuccessfully, the accompanying reasoning sheds light on the special treatment that hedge funds receive from investment banks – and the potential for abuse.In February 2003, Goldman Sachs was appointed to raise up to $3bn for Sumitomo Mitsui Financial Group, the Japanese bank. Before launching the issue – codenamed “Project Shoot” – Goldman called potential investors. Mr Jabre was on the list. GLG is among a handful of hedge fund experts in trading convertible bonds, the instrument that SMFG planned to issue. Convertibles were then a popular financing tool for companies. They pay a coupon like ordinary bonds, but can later be converted into equity. It was – and remains – common for investment banks to tell potential investors about forthcoming securities issues. That helps the pricing. The proviso is that the investor must agree to keep the sensitive information secret – and not trade on it. For their trouble, investors sometimes receive a chunky allocation.Goldman telephoned Mr Jabre one evening six days before the issue was made public. The firm had a script for such calls, that involved asking the investor to agree to the necessary confidentiality and trading restrictions before proceeding with questions about the issue.In his dealings with the regulator, Mr Jabre disputed he was read the script in its entirety. But he had agreed to be “wall-crossed” – jargon for being made an insider – and to restrictions on trading. He was then told certain key details of the forthcoming SMFG bond issue. Later, Mr Jabre asked the salesman, understood to be John Rustum, a Goldman managing director, if participating in the earlier call restricted his existing trading strategies relating to SMFG. The Goldman salesman took this request to his compliance department via e-mail. “Spoke to Philippe Jabre at GLG on Shoot,” the message says. “He has already borrowed Shoot stock along with the stocks of the other 3 big Japanese banks and has orders out with multiple brokers to borrow more if available of all four stocks. Does his wall crossing preclude him from putting out any new orders to borrow Shoot stock or does he have any problem having any preexisting orders getting filled? I told him I would get back to him.”The compliance department replied that Mr Jabre could not “put out any new orders or trade the name at all”.What followed is unclear. The salesman told compliance he had spoken to Mr Jabre, “and he understands”. But Mr Jabre disputes he was told he could not put out new orders or trade. He says he was told he could “maintain his existing trading pattern”.Mr Jabre then short-sold nearly 5,000 SMFG shares, worth $16m, in eight successive trades. Short-selling involves selling borrowed shares so as to profit from any fall in a share price. When the issue was launched, Mr Jabre shorted a further 11,000 shares. This made a small profit of $500,000 in the short-term. Come the pricing three days later, SMFG had dropped 22 per cent as other hedge funds sold the stock.However, the trade lost as much as $30m, when the price of the $205m of convertibles that Mr Jabre subsequently received in the issue collapsed. It was months before the trade recovered those losses – and more – according to a person familiar with the situation.Mr Jabre argued that his trading was legitimate because he had not been told that any issue was definitely coming. Moreover, he was told he could maintain his “existing trading pattern”. This included one short trade on SMFG and a large borrowed position of Japanese bank stocks that he could have potentially sold short.The FSA rejected these defences. It said Mr Jabre’s trading in SMFG between the Goldman call and the issue’s launch was based on what “a regular market user” would have recognised as inside information.